Walgreens needs a strong prescription—for recovery.
After Walgreens CEO Stefano Pessina called the second quarter “the most difficult” since the company’s acquisition of Alliance Boots in 2014, Walgreens Boots Alliance surprised Wall Street by beating third-quarter earnings, reporting adjusted earnings of $1.47 per share compared to Refinitiv expectations of $1.43.
The drugstore chain’s stock shot up over 4% in intraday trading on Thursday, but investors overall don’t seem too bullish. Walgreens’ stock is down over 23% so far for the year and profit fell to $1.03 billion in the third quarter compared to $1.34 billion in the period a year earlier, according to the company’s filing.
Although Walgreens beat expectations, Brian Tanquilut, healthcare services analyst at Jefferies, said “it’s a very low bar.”
He said “these kinds of results are sufficient to drive upside for the day,” but he doesn’t expect Walgreens’ stock to break out of its usually tight trading pattern based on one positive quarter.
While Walgreen executives were pleased with the results on a call with analysts Thursday, it appears the drugstore chain has a ways to go in order to stay in good health. And industry-wide problems may be the source of the company’s pains.
Pessina told analysts on a call that “the pressures we have seen for some time continues to impact our businesses, and we still have a lot to do to develop the transformation and data to get ahead of the market trends again and return our company to strong and consistent growth.”
What has been ailing Walgreens?
Much like other drugstore chains, the shift in consumers buying more household goods online rather than at brick-and-mortar stores has hurt the industry—Walgreens included. Online retail titan Amazon has begun dabbling in the online pharmacy space, announcing on Thursday a partnership with Rite Aid to offer Amazon pick-up in Rite Aid’s stores.
Jefferies’ Tanquilut believes that while the immediate impact of the venture shouldn’t be too severe since it’s largely on the non-pharmacy side, the trend toward online may incrementally hurt Walgreens’ retail business.
Walgreens, however, faces other problems. Given Walgreens’ U.K. store presence, analysts like Tanquilut are concerned about the company’s exposure to Brexit tensions. Walgreens’ CFO James Kehoe told analysts the company will close around 200 Boots stores in the U.K.
Additionally, the company reported a decrease in U.S. store sales (by some 1.1% from the previous year), attributed to a “de-emphasis” on tobacco products.
Ongoing reimbursement rate pressures and drug price inflation won’t subside anytime soon, Tanquilut said. While insurers not paying pharmacies as much to fill prescriptions is a negative for Walgreens, the problem is industry-wide.
Still, Walgreens laid out plans in April to save an estimated $1.5 billion in annual savings by 2022 by shuttering stores and consolidating warehouses.
The drugstore chain isn’t giving up on brick and mortar stores. Walgreens signed deals with FedEx, Kroger, Sprint and others in an attempt to drive more traffic into stores—including providing drop-off/pick-up package services, adding grocery products to Walgreens locations and offering wireless and technology services to customers, respectively.
Jefferies’ Tanquilut thinks Walgreens’ strategy to offer healthcare services (what he calls “keeping up with CVS“) to create a “health hub” may become a major source of revenue.
Walgreens’ partnership with UnitedHealth Group’s MedExpress for urgent care may be a strategic move to offer both retail pharmacy services and healthcare in or near the store. Walgreens announced earlier this year that they are also working with Chicago-based VillageMD to offer primary care in a pilot initiative in select areas.
Despite the initiatives, Tanquilut said ”gross margin pressure is going to be there” for the near-term.
That’s going to be tough medicine to swallow for now.
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